Journal: Chuck Spinney Flags Aurback, Posts Reflections on the Economic Bust

03 Economy, Commerce, Commercial Intelligence

My bills are all due and the baby needs shoes and I’m busted

Cotton is down to a quarter a pound, but I’m busted

I got a cow that went dry and a hen that won’t lay

A big stack of bills that gets bigger each day

The county’s gonna haul my belongings away cause I’m busted.

Ray Charles

Economic optimism is in the air — at least in rarified air of the twin palaces of Versailles On the Potomac and Versailles On the Hudson.  And if you believe the newspapers, there are growing signs that the economy is turning around, and America has dodged the depression bullet.

To be sure, most of the available evidence suggests the economy is still shrinking, but the good news is that it is shrinking at a slower rate.  In fact, many of the troubled Wall Street investment banks (the homes of the flimflam artists who provoked the economic crisis), now bailed out by the taxpayers on main street and heading to the Hamptons for a little R&R, are now reporting profits and bonuses (albeit some, like Goldman Sachs, with the help of accounting changes).  Moreover, the Bureau of Labour Statistics (BLS) just announced that the rate of job loss declined in June, with nonfarm-payroll job losses falling to 247,000 jobs.  This “good news” resulted in a small decline in the unemployment rate from 9.5% to 9.4%, prompting many commentators to claim the economic decline is slowing, or bottoming out, or even is in the early stages of a recovery. But BLS also said number of long-term unemployed (those jobless for 27 weeks or more) rose by 584,000 to 5.0 million, and the size of the total labour force shrank by about 790,000, reflecting a decrease in the labour participation rate including, among other things, a very large number of workers who simply gave up hunting for jobs and were conveniently no longer counted in the unemployment percentage. Powered by the apparent recovery of financial sector and apparent good news on other fronts, like the job sector, the stock market — that unstable mix of greed and fear — now stands about 40% higher than it did at its low point in early March.

So what is the matter with this picture?

Nothing, if you are a courtier in Versailles, because it reflects an orientation to reality based on observations that are in fact manufactured abstractions, in this case agglomerations of accounting gimmickry and statistical complexities that are difficult to comprehend and therefore susceptible to oversimplification, especially when fed to a soundbyte-addicted mass culture that gets most of its “information” from images shaped by pseudo events, illusions, and politically motivated contrivances.

Which begs the question: What is happening in the real world outside Versailles, where they eat cake?

Well, main street is about home ownership.  One reason for shoveling all that taxpayer money to the Banksters, who created the financial instruments that inflated the housing bubble so spectacularly, was to provide liquidity to a distressed housing sector that was falling apart because of the rapidly rising foreclosure rates and its effect on plummeting home values.  The housing sector is the primary reservoir of consumer wealth, and its health as a strong effect on consumer spending, which is the engine of the American economy.  It was promised, therefore, that the bank bailout would trickle down to Main Street and provide the liquidity needed to refinance troubled mortgages and thereby reduce the rate of foreclosure, which was depressing the value of the housing stock, with a negative wealth effect that was causing consumers to retrench.

Defaults
Defaults

The attached bar graph, recently produced in the Orange County Register, provides a microscopic picture of foreclosures in the housing sector.  It suggests that the rate of foreclosure may be unaffected by the bankster’s return to a level of profitability sufficient to relaunch their lucrative bonus programs. The two bars of interest are (1) the REO rate (the yellow bars), which reflects houses already forclosed but still held by the bank.  And (2) the 90+ Day Delinquency Rate (the blue bars)  which included all mortgages that are three months late or more; it also includes and can not be separated from those foreclosures already in process (the red bars).  In other words, in Orange County, California, presumably one of the hardest hit areas of the United States, the rate of increase in actual and potential forclosures is increasing, while the rate at which foreclosed houses are being held by the banks is decreasing, implying the foreclosed houses are being dumped on the market more quickly by the banks, which if true, would combine to suggest that downward pressure on household wealth is increasing rapidly and has been unaffected by the bank bailout.

To be sure, this micro data is for only one county in one of the hardest hit areas in the United States, but it does raise the question: to what extent will the downward economic pressure in housing sector depress consumer spending to offset the optimistic prognostications for the economy, now permeating the soothing images being fed to the American masses?

My good friend Marshall Auerbach, an experienced investment manager and a bit of a renaissance man with an eclectic range of interests, has just written a very important albeit depressing report that addresses this question.  It is attached herewith, and I urge you to read it carefully.

Chuck Spinney

Locked Down by Wind in the Dardanelles, Canakkale, Turkey

Click on photo to meet Martin Aurback and his analytic reflections on the economy.

Martin Auerback
Martin Auerback